Saturday, May 01, 2010
5:18:34 PM EDT

Oil Spill Greases Market Slide

by
Jim Brown

The spill that won't die, the Greece debt debacle that won't go away and the next chapter in the Goldman saga all combined to crush the markets as April ended.

Market Statistics

The news events overpowered some decent economics and pushed the markets back to the support levels we have seen twice in the last two weeks. The big headlines included a new criminal investigation into Goldman Sachs by the Justice Dept. That knocked another $15 off Goldman and crushed the financial sector. The Justice Dept inquiry was almost a certainty after the SEC sued on possible fraud charges. This is simply the beginning of a process to see if there is any justification for filing a case. There is no criminal case. This is just an investigation.

The burden of criminal proof requires that rules were knowingly broken with criminal intent. That is much, much more difficult to prove than a common civil suit. The odds of anything being filed are probably less than 5% and the odds of a conviction are probably less than .05%. There has to be criminal intent and it has to be proved beyond a shadow of a doubt in court. This is just a process that has to be followed so that nobody comes back on the Justice Dept with complaints they did not investigate.

I continue to get emails about Goldman that clearly show the majority of readers do not understand the facts. The SEC alleges that Goldman did not tell ACA that Paulson was going to buy puts on the transaction. In reality the SEC has later admitted that a Paulson employee told ACA in two different meetings that Paulson was going to by puts on the CDO. The fact that the SEC has admitted receiving testimony to this admission makes it even more troublesome that the civil case was ever filed. The SEC commissioners split 3:2 on the decision to file so obviously they are not confident about their case.

Lastly the offering documents clearly say that Goldman or other parties may have conflicting positions including shorts. In fact a synthetic CDO must have a long side and a short side and ACA understood this after doing 22 prior CDOs. ACA actually touted themselves as being the most experienced and the most knowledgeable CDO managers in the world. ACA never claimed they did NOT know that Paulson was going to buy puts and ACA approved every RMBS that was included in the deal.

There is no case here either civil or criminal and the entire event, which has cost U.S. investors over $20 billion in lost market cap on Goldman, was a politically inspired event. The SEC knew for several weeks that the SEC Investigator General was going to release a scathing report on that same Friday on SEC errors on failing to catch Bernie Madoff and Alan Stanford despite numerous tips for more than a decade that both were serious frauds. The SEC knew the same IG was going to release a scathing report on rampant porn use on SEC computers. The SEC brass also knew the administration needed a big case against a high profile Wall Street firm in order to get the new financial reform bill passed. This is clearly an attempt to demonize Goldman and Wall Street banks in general for political gain and as a smoke screen to cover up the other SEC problems.

Goldman Sachs Chart

The Greek debt crisis took another turn on Friday morning. Moody's downgraded the debt and deposit ratings of nine Greek banks with an outlook of negative, which means there could be more downgrades ahead. Moody's said "increasingly challenging economic prospects point to low business growth, increased loan quality problems and continued pressure on margins." Anybody spending more than five minutes thinking about the Greek austerity problems could have come to the same conclusion. Moody's said market confidence in the banks had declined so much in recent months that they now rely on the European Central Bank for about 15% of their liquidity.

The IMF warned German lawmakers that the aid package for Greece could rise from the â‚¬45 billion currently pledged to as much as â‚¬160 billion over the next three years. The currently pledged â‚¬45 billion still needs the approval of Germany before it can be concluded. Germany is balking at the deal without additional austerity measures because Greek citizens are escalating their objections to the austerity plans. Some 60.9% disapprove of the governments efforts to implement austerity measures. A general nationwide strike has been called for May 5th to protest the austerity programs. Greek regulators banned shorting of any kind on the Athens exchange.

The real worry is that in order for Greece to pay its current and future debt it would have to restructure those debts. That means a holder of greek debt won't be paid in full or on time. For instance if you held a â‚¬100,000 ten year bond due in 2020 you might get â‚¬50,000 in 2025. By restructuring, a polite word for screwing debt holders, Greece could lower its total debt and cut payments on that remaining debt significantly. This is the real fear behind EU countries in coughing up money for Greece. They may never see it again.

The extended problem is the contagion to other EU countries. The OECD secretary general said the Greek debt problem was like the Ebola virus. "Once you realize you have it you have to cut off the affected limb in order to survive." Officials in other EU countries are wondering if it could progress to the point where the ECB could be weakened to the point of needing a bailout itself. The ECB already holds tend of billions in Greek bonds plus billions in bonds from Spain and Portugal. The Euro currency is under speculative attack and the lack of a resolution to the Greek problem is making it worse.

The EU has called an emergency summit on Greece to meet in Brussels by May 10th to try and coordinate the initial bailout. However the rapid plunge in the various European markets caused officials to escalate their plans and late Friday several ministers were assuring the world that a resolution would be complete by Sunday. One Greek official said Greece has two remaining options. The first would be to accept the tough and difficult austerity options the EU and IMF have demanded. The second would be to choose bankruptcy and exit from the Eurozone. That exit would allow Greece to default on its debt and issue a new currency. The potential of that default and its ramifications is what the world is worried about. Not only would it erase roughly â‚¬350 billion in debts and cause serious banking problems but it would also set a dangerous precedent for Portugal, Spain, Ireland and Italy, which are suffering problems of their own.

This is not going away until the EU and IMF actually provide enough cash to take Greece out of the spotlight. We have had several "deals" over the last couple months but none have actually led to money changing hands. It seems talk is cheap and writing checks is a lot more difficult. I expect some new announcement by Monday but Greece has a hard deadline of â‚¬11.3 billion due by May 19th to avoid a default. We are going to continue to suffer from headline event risk until something material is concluded.

Even more prominent in U.S. headlines is the growing oil spill in the gulf. The spill has now hit the shore in Louisiana and Alabama. Florida is in panic mode as the slick heads in its direction. As far as the well itself nothing has changed. It is still leaking 5,000 barrels per day from three different areas. Late Friday, Ian MacDonald, a researcher from Florida State University said the leak could be as much as 25,000 bpd. He used NOAA data to measure the slick, thickness of the oil and type of oil and compared it to other known spills in the past. NOAA experts did not dispute his calculations. John Amos, a geologist who has worked as a consultant with Exxon, Shell and BP said a more realistic estimate was in the range of 20,000 bpd.

Crude Oil Chart

BP is rushing to complete three steel boxes 14 feet wide and 40 feet tall to be lowered over the leaking areas. The leaking oil is lighter than water and will rise to the top of the boxes where pipes would carry it to the surface to a waiting barge. This would only temporarily solve the problem and it has never been done in water this deep. Plenty of technical challenges but BP is betting millions on the concept.

Secondly BP is positioning two additional rigs each one half mile away from the leaking well and both will begin identical relief wells in an effort to sever the pipe in the first well several thousand feet below the surface and inject some super heavy sealant into the well to permanently stop the flow of oil. The odds for success on the first try are very slim so BP is spending $100 million on each rig in hopes one of them is successful.

If the thought of drilling a 18,000 foot horizontal well in 5,000 feet of water from half a mile away in an effort to hit a 12-inch metal pipe from the first well with a metal chewing bit sounds a little unbelievable, your right. It is never easy but it has been done many times. From what I understand they apply an electric current to the first well and then use a magnetic sensor in the relief well in an effort to hit it exactly. It sounds like science fiction to me but apparently this is a proven method for intersecting the leaking well. Another option is to drill to the exact bottom of the first well and try to inject the super heavy sealant into the actual formation and basically kill the porosity of the formation around the initial well.

Most people have the mistaken idea that there are pools of oil under the ground. This is incorrect. The oil is in rock or sand that is porous and the oil flows through these pores much like water flows through a sponge. If they can inject enough sealant into the formation at the bottom of the initial well then they can seal these pores and kill the flow of oil to the well.

Either way the relief wells could each take up to three months to complete. Can you imagine the outcry over three more months of leaks from the initial well? That is why BP is racing to try the boxed funnel concept as quickly as possible. That could take another 3-4 weeks before they are ready for a test.

The escalation of news coverage over the last week has been horrible for the energy stocks involved in the well explosion. BP is the one you would expect to have suffered the worst and it has fallen -15% since the explosion on Tuesday April 20th. In those ten days since the rig explosion we have learned that a couple other players were involved besides RIG and BP.

Cameron International (CAM) manufactured the blowout preventer that is now the focus of the problem on the sea floor. In theory the blowout preventer (BOP) is supposed to slam shut when a blowout occurs. This closure occurs with enough force to physically slice completely through the drill pipe in order to completely seal the well bore. Obviously theory and practice rarely meet on good terms. The current thought is that there may have been a pipe joint, the reinforced ends where two drill pipes join together, exactly where the pipe slice should have occurred. The reinforced sections occur every 30 feet and may have been too thick for the slice to have been completed. The BOP is a 450-ton collection of valves that sets on the top of the wellhead. This particular one was manufactured in 2001.

Cameron Blow Out Preventer

Cameron stock plunged on Thursday after their name became public. That was the same day the Coast Guard upgraded their leak estimates from 1,000 bpd to 5,000 bpd. CAM saw their stock drop from $44.50 to $34.50 intraday. Cameron was quick to announce they had $500 million in liability insurance through AIG. This stopped the decline and CAM actually closed positive on Friday. If the BOP is proven faulty, BP could have a claim against that liability insurance. However, it could be months if not years before that BOP is ever to see the light of day again, if ever.

Chart of Cameron

I think the company with the bigger problem is Halliburton (HAL). Halliburton was responsible for cementing the well in preparation for plugging it until it was reopened as a production well. According to reports the cementing operation had just concluded when the well exploded. Here is the gotcha. In November 2009 a Halliburton employee gave the following presentation regarding the dangers of cementing a deepwater well. I am giving you the link and I will summarize. LINK TO PRESENTATION

Basically the deep-water deposits of hydrocarbons can contain a high concentration of methane gas. The temperature on the ocean bottom is near freezing (33-35F) and the gas is locked into the sands in a form of "frozen crystallized formations" of compressed methane gas.

Anyone who has ever been around wet cement knows that the process of setting creates a chemical heat. In the presentation the slides show that this heat in a deepwater model can reach nearly to the boiling point.

Pumping tons of wet cement into frozen compressed gas would be the equivalent of pouring boiling water into an ice chest of dry ice. As soon as the concrete begins to set the maximum heat is generated between 900-1100 minutes (15-18 hours) from the start of the operation. (HAL said it completed the cementing 18-20 hours before the blowout) As this heat builds the surrounding sand is thawed and the frozen compressed gas is released in violently uncompressed form. HAL claims, "Destabilization of these frozen compressed gases during cementing and production in deepwater environments is a challenge to safety and economics."

Slide from Halliburton Presentation

Halliburton lists in the presentation the different factors that need to be taken into consideration in order to prevent a blowout disaster. Conveniently for investigators they included the following footnote under the list of objectives that must be heeded.

Footnote from Halliburton Presentation

We are all going to hear a lot more about compressed gas and the dangers of cementing as this spill analysis continues. A 2007 study by the U.S. Minerals Management Service found that cementing was a factor in 18 of 39 blowouts in the Gulf over the last 14 years. This was the single largest factor even ahead of equipment failure and pipe failure. Companies like BP hire Halliburton to do the actual cementing because of the danger and because of Halliburton's experience in the process.

Halliburton gained some of that experience with a cementing blowout of a deepwater well in the Timor Sea off the coast of Australia in August 2009. The rig caught fire and the well leaked tens of thousands of barrels of oil in the ten weeks it took to finally shut it down. I suspect HAL will be found at fault and share in the cleanup expense. I would bet HAL has extensive liability insurance but I have been unable to verify it.

Late Friday we learned that the House of Representatives Energy and Commerce subcommittee has called Lamar McKay of BP, Steve Newman of Transocean and David Lesar of Halliburton to Washington for a public hearing on May 12th and they requested all pertinent documents relating to the rig accident. This should be interesting given the billions in potential liabilities.

Halliburton Chart

The sell off I don't understand is in Transocean (RIG). Transocean has no liability for the spill with indemnification and hold harmless clauses in all its lease contracts. They do have liability for the injuries and deaths of Transocean employees and they are fully insured for that. They also said they had $560 million of insurance on the RIG and would be fully insured for its loss. RIG has the least exposure on the spill than anyone but they have suffered the biggest decline in stock price.

BP has even claimed full responsibility for the spill and the cost of cleanup several times but RIG continues to decline. RIG hit a high of $92.67 the day of the explosion and traded below $70 on Friday. That is a 25% drop and they have the least exposure to the spill other than Cameron with their $500 million insurance on a ten-year-old BOP. It would be hard to pin the problem on Cameron unless the BOP was found to have some latent structural failure.

I believe RIG will be exonerated and will recover quickly once the leak is fixed.

Chart of RIG

All of the energy sector and specifically deepwater drillers and service companies suffered on Friday after President Obama reportedly said he was going to halt offshore drilling until the cause of the problem was found and new methods devised to prevent future events. This was given as another reason for the decline in RIG since drillers could claim force majeure on their leases to Transocean.

On the surface a halt to offshore drilling sounded like a draconian response to a relatively rare problem. It is the equivalent of closing the barn door after the horses escaped. There were 29 new wells started in the gulf over the last month alone. The entire sector collapsed and the price of oil shot up to $86.50. There were also some reports that he wanted to shutdown existing production facilities in order to prevent a new problem. Those reports turned out to be in error.

Later in the day and I am sure in response to a flood of angry calls the president qualified that earlier statement to mean there will be no NEW offshore drilling leases issued unless rigs have new safeguards to prevent a reoccurrence of the Horizon explosion. Since there are only two Gulf leases up for bid late this year and only four more in the Gulf and off Alaska in 2011 it turned out to be only a token comment to appeal to the population that is against offshore drilling for any reason. A clear case of an empty political gesture that knocked much of the energy sector for another loss on Friday.

White House spokesman later clarified that contrary to reports no oil production was being halted. The president did confirm he was sending a team of lawyers to the Gulf to vigorously enforce the laws that protect the environment and the American taxpayers. Shucks, I thought they were going to be wading the marshes with a roll of paper towels to clean oil off the alligators.

The events above captured the attention of traders and investors and Friday's positive economics were ignored. The first GDP report for Q1 showed economic growth of +3.2%. That was down from the +5.6% rate in Q4 but as I have mentioned several times in these pages that was not true growth. It was basically due to inventory adjustments rather than broad based growth. Even in Q1 private inventory adjustments accounted for +1.6% and half of the growth.

The economy is still expected to grow over the next several quarters but that GDP number will continue to decline as the impact from inventories declines. This was the third consecutive quarter of growth. Homebuilding declined in Q1 and was a drag on the GDP. However, personal consumption rose +3.6% compared to only +1.2% in Q4. Sales of durable goods rocketed higher at an 11% annualized rate. Good news continued for the Fed with the core PCE deflator, a measure of inflation that excludes food and energy, rose just 0.6% compared to +1.8% in Q4. That is the lowest rate of core PCE inflation since they started keeping records 60-years ago.

This was a positive report despite the decline to 3.2%. This suggests the economy is accelerating on the back of personal consumption. As employment increases we should see the personal expenditures increase.

GDP Chart

The Consumer Sentiment report showed that sentiment rose to 72.2 from the initial reading of 69.5. However, respondents claimed they were depressed despite their higher spending. The headline number was revised higher but it failed to reach Q1 levels. Both the current conditions component and the expectations component fell -1.4 point below March levels. This was the third month without an overall increase in the headline number and that is not a good trend considering the equity markets were at 52-week highs.

The biggest drag on sentiment is still the 16% unemployment (U6) and the rising price of gasoline. Now that the homebuyer tax credit is over there will be additional frustration by anyone with a home unsold and those who tried but were unable to meet the deadline for qualifying for the credit.

Consumer Sentiment Chart

The ISM - NY posted a +6 point increase to 429.4 for the ninth consecutive month of gains. However, the six-month outlook component fell to 75.9 from 88.2 in March. The current conditions component at 62.2 has fallen from the 78.1 reading in February but the streak above 60 is still the longest since 1999/2000. The employment component rose sharply from 55.1 to 61.8 suggesting an addition of 30,000 jobs in April. This was a good report but did have some troubling component declines.

The ISM - Chicago posted a stronger than expected gain from 58.8 to 63.8 in April. Anything over 50 is expansion territory. This was much better than the 60.3 analysts expected. The employment component rose sharply from 53.1 to 57.3 and order backlogs spiked to 61.4 from 54.3. New orders rose from 61.8 to 65.2.

The Chicago ISM (PMI) has now risen to a three year high and appears to be accelerating. However, the Chicago area is heavily influenced by auto manufacturing and does not signify conditions in the rest of the country. That will be shown in the national ISM next week.

Chicago ISM Chart

For next week the economic calendar has several important events including the Non-Farm Payrolls for April. The first report is the national Manufacturing ISM on Monday, which is expected to be somewhere in the range of 60.1 compared to 59.6 in March. Given the higher numbers on some of the regional reports I expect the national numbers to be slightly higher than estimates. Wednesday is the national ISM Non-Manufacturing or commonly called the services report.

The Factory Orders report is actually expected to show a decline to only 0.3% growth. That would be the lowest level since August 2009 and only half of the prior month. This is a lagging report for the March period.

The 800-pound gorilla will be the Non-Farm Payrolls on Friday. The current official estimate is for a creation of 175,000 jobs compared to a gain of 162,000 in March. The unofficial numbers include Joe Biden's estimate of 250,000, Morgan Stanley 250,000 and a couple of whisper numbers over 300,000. Since we know that the BATF halted normal finger print research for state and local agencies for two weeks in order to process as many as 500,000 applications for census workers, I think the odds are good the actual number will be higher than the 175,000 estimate.

The payroll report should be a cloud over the market all week despite the expectations for a good report. Census workers should have added a significant number of new hires. Be sure to listen for the key word "census workers" if you hear a politician taking credit for the jobs. If they mention census workers they are legitimate. If they don't mention census workers they are trying to mislead you. The census jobs are 3-5 month temporary jobs and not to be confused with real job growth.

Economic Calendar

Earnings may still capture some headlines next week although more than 70% of the S&P has already reported. Of those that have reported 78% beat estimates by an average of 16%. Only 14% missed estimates. The blended earnings growth rate was a very strong 53%. However, top line revenue growth was only 11%. Most of the earnings were still due to cost cutting, which produced higher margins. When revenue growth does appear it will lead to even higher profits.

The homebuyer tax credit is history. The renewed tax credit program expired on Friday. Contracts must have been signed by April 30th. Homebuilders were frantically pulling out all the stops to get people to sign a contract. Lennar (LEN) was offering homes for a $25 down payment. Ryland (RYL) was doubling the tax credit. Every builder was offering some kind of incentive to beat the clock. On Monday they will probably be reconsidering their staffing requirements and deciding who to layoff.

Housing starts are going to plummet now that the tax credit carrot is gone. If you look at a long-term chart of home sales the spike in Oct/Nov was much stronger than the Q1 spike although we won't have April's numbers for three more weeks. It should be very strong. Existing home sales rose +6.8% in March and new home sales rose +26.8%. It is the May and June numbers that are going to fall off a cliff. I suspect homebuilders are a short today.

Mark Zandi said on Friday that counting new homes, existing homes, homes in foreclosure and bank owned there are more than 10 million homes for sale. The ideal number for an active market is between 7.5-8.5 million. That means there are roughly two million too many homes for sale. With home sales running about 375,000 per month with no tax credit it could take 6-9 months before inventory levels correct to anything resembling normal. Most believe the housing market will slump for the rest of 2010 and not pickup again until spring of 2011. Fannie Mae still has a 3.5% rebate program for buying one of their foreclosures so there are incentive deals available.

Existing Home Sales

The pending decline in the housing sector may be just one more problem for the U.S. economy to deal with. An article by Society General's (SocGen) Albert Edwards last week suggests the U.S. economy is about to roll over. He predicts a decline within 6-9 months. He bases this on the rate of change in the economic indicators. That means they are moving higher at a slower rate of speed. He is using the ECRI Leading Indicators and the Conference Board leading indicators as his basis.

I am going to give you the link to his article because the charts are too technical to explain in my limited space here. Basically you can picture a child's water rocket in flight. As it nears the top of its flight the momentum slows and it starts to wobble. When the water pressure is gone the rocket falls back to earth. Let's say the rocket flew 50 feet straight up. The second ten feet would be slower than the first ten. Third ten slower than second ten until eventually the last ten feet would be the slowest rate of climb and ending in a fall. LINK TO ARTICLE

The FDIC closed seven more banks on Friday bringing the total to 64 for the year. There were three in Puerto Rico, two in Missouri and one each in Michigan and Washington. The three failed banks in Puerto Rico held more than a fifth of the total bank assets in Puerto Rico. The cost to the FDIC from all seven banks was just over $2 billion. The number of banks on the FDIC problem list has risen to 702 from 552 in the prior quarter.

In another move the Office of Thrift Supervision denied the proposal for TierOne Bank's (TONE) proposal to sell 32 branches to Great Western Bank. The OTS said the proposed sale would leave TierOne in worse shape than ever. TierOne is circling the drain, has not filed financial statements for Q3 or Q4 and in a filing in February said it had less than half the capital regulators required. The OTS had given them until the end of April to improve its capital position and until the end of May to produce new investors. TierOne has about $3 billion in assets and I suspect they will soon be on the closed list.

Another interesting article was the Bank of America-Merrill Lynch Hedge Fund Monitor report. (Link below) The equity long/short hedge funds (HFs) reduced their market exposure to 25% net long. According to BoA that is well below their historical average of 35-40% net long. BoA also showed large speculators were selling their long NDX futures and adding to shorts in the S&P and Russell-2000 futures. Funds were still adding to energy longs (futures) and continuing to short natural gas. LINK TO REPORT

If hedge funds were shorting the S&P and Russell last week they picked the perfect spot in the market to make that play. The event risk seems to rise another notch every day and we have had more declines in the last two weeks than in the last three months.

Dow Chart - 45 min

I expected the market to weaken around the FOMC meeting but I did not expect the daily headlines of Greece, Goldman, oil spill, etc, to accelerate that decline. Those unknown events made perfect excuses to lighten the ship at what could be perceived as a market top.

The VIX is back at a two month high at 22 and you may have noticed the markets did not rally into the close. I told readers of Option Writer on Thursday night to watch the close on Friday. In recent weeks we have seen rallies on Friday afternoons because shorts were not convicted enough to remain short over the weekend. I told those readers if Friday closed on the lows then market sentiment has changed. Apparently we are seeing that sentiment change in progress.

The Dow lost -158 points on Friday to close the week down -1.75%. On Tuesday I warned that until the Russell began to lose more on a percentage basis than the big caps the bulls were still in control. The Russell lost -21 points on Friday and -3.4% for the week or twice the decline of the Dow. The Russell closed at an eight day low and the Dow closed on support above its lows. Small caps are leading the way and it is not up.

Granted these could just be news related knee jerk reactions but we are entering that period of the year where long-term trend changes tend to occur. The trend has been higher since March 2009 and that is a long time to maintain a trend. There have been six short-term material declines in that long-term trend but none since January. The major indexes completed eight consecutive weeks of gains in the prior week. That has not happened since 2004. It is simply time to rest.

The Dow declined to initial support at 11,000 at the close. That has been support since April 13th. A break of this level should test 10,850 and a break there goes to 10,700. While this does not necessarily mean we are going into correction mode it would not be a good sign ahead of summer when stocks are typically weak.

If, and that should be a capital IF, the Greek problem is resolved on Sunday as several EU ministers claim then Monday should be a strong market day because the bears went home short. A strong Monday does not mean the rally is back on but depending on the news it could delay any further weakness for a while.

Dow Chart - 90 Min

Like the Dow the S&P declined to support at a critical level but failed to move lower. The S&P closed just over 1185 and a clear level that would signal a new shorting opportunity if broken. Both indexes completed a lower high and a lower low would confirm the trend change. If 1185 fails then support at 1170 should be tested followed by 1150. However, I believe a break of 1185 would be evidence of a sentiment change and suggest a new downtrend that could last for some time.

S&P-500 Chart

The Nasdaq lost 50 points twice last week and closed just above support at 2450. Apple gave back -7.50 to lead the decline but other big cap techs are also rolling over. For instance Intel and Microsoft both closed at two-week lows after several days of declines. The semiconductor index also closed at a new two-week low and lost -4.5% for the day and -6% for the week. Where the chips go the Nasdaq follows.

If the Nasdaq breaks support at 2450 it should quickly test 2400. If 2400 breaks it could be a long drop to 2250. However, that 2400 level is decent support. The Nasdaq consolidated there for three weeks in March. If I were long tech stocks I would not wait to see if 2400 breaks. I would bail on a break below 2450 and review my priorities.

Nasdaq Chart

The Russell 2000 may have led the decline last week with the -3.4% drop but it is still well above support. I am concerned that fund manager sentiment could be changing given the Bank America report that hedge funds are increasing short positions in the Russell and S&P. Hedge funds are different than normal equity funds where most have their retirement money parked BUT some of those "normal" funds do pay attention to hedge fund trends as a leading indicator for their own actions. If the Russell continues to lead to the downside in percentage terms I would be very cautious about remaining long.

Russell 2000 Chart

After Tuesday's big drop I said I would be a dip buyer on Wednesday. While that worked out well the continued barrage of news events killed that trade by Thursday's close. Thursday's morning rally ended with an afternoon stall and slight bleed into the close. Friday's headlines cemented that downward direction we are right back at that decision point once again.

As I said above, the market on Monday will depend on the resolution of the Greek debt problem. If there is a "firm" resolution then I think the shorts will be squeezed once again and we end up with another day of high volatility. Without a resolution I am afraid we are going to see a support break.

There are not enough earnings next week to keep traders interested and there is the event risk from the payroll report on Friday. Energy will continue to be a sidelight until the leak is stopped in the Gulf. Once stopped all drillers and service companies should be a buy.

I did not get the post FOMC reaction I was expecting. The Fed did a basic cut and paste on their announcement and the market yawned. Evidently there were not as many people expecting a change as I thought. I suspect the Fed saw the 0.6% core PCE and a 60-year low and immediately started worrying about the potential for deflation. With a 0.6% PCE they could remain on hold for the rest of the year. They fear deflation much more than they do inflation. With the potential for the economy to roll over again in the months ahead the lone hawk on the FOMC had to be content with a dissention footnote at the bottom of the announcement.

Volume last week averaged nearly 11 billion shares per day with 12.6B on Tuesday. We were averaging 7.5-8.0 billion just two weeks earlier. The increased volume and the triple digit days is the clearest evidence of a trend change. High volume and high volatility can be evidence of market tops and market bottoms. That is especially true when support and resistance produce nearly immediate rejections.

While nobody can predict the market with daily high profile news events that change the tone of trading for the rest of the day, I still believe we are going to see further weakness in the days ahead. I don't think it will be serious unless there is some further news to poison sentiment. I simply believe that we are due a rest and the sell in May crowd might actually get some respect in 2010.